Last week I had three days in the southern Italian city of Naples. It is one of Europe's great waterfronts; the soft morning light of the bay with Vesuvius beyond and Capri but a short boat-ride away.

The narrow, closed-in streets with their hanging laundry remain inscrutable to outsiders. The Neapolitans are stubbornly untameable. From obeying traffic signals to flogging fake handbags, the city hovers on the edge of illegality.

Visitors come but not to see Naples itself. Its reputation deters them. They come for a stop-over before going to an island or Pompei or climbing Vesuvius and wondering why you would build on its slopes.

Most of those passing through were Japanese, Americans or British. I did not hear or see many Germans which was a pity. They should be there, for Naples has much to tell the German taxpayer.

For many that involves a choice. Either Europe decides that the debts of the 17 eurozone members should become common debt or the zone is heading for a break-up. It is too stark a choice but it is often stated; either the German taxpayer guarantees the debts of others or the single currency will collapse.

So the Italian Finance Minister Giulio Tremonti is touting eurobonds as the "master solution".

"We would not have arrived where we are if we had had the eurobond," he enthuses.

The attraction to countries like Italy is obvious. They could refinance their debts on the same terms as Germany. It would mean lower borrowing costs for them and higher costs for Germany.

But if you are a German taxpayer it might be worth pausing before accepting such an embrace. And that is where a visit to Naples might be instructive.

In southern Italy the culture resists change. A quarter of GDP is probably made up by the black economy. As much as 80bn euros (£70bn) a year are lost through tax evasion. Organised crime has a huge and growing impact on the local economy.

Image copyrightAPImage caption
The German Finance Minister Wolfgang Schaeuble rules out eurobonds under current fiscal rules

As businesses close it is the Camorra with its cash that grows in influence. Sixty per cent of 16-24 year olds are without work - although many get by doing a few turns in the black economy.

Setting up a business is prohibitively difficult. A local businessman said that firing bad workers is all but impossible even if they steal. In the past 10 years Italian labour costs compared to Germany have risen and the country has lost competitiveness. With the single currency the Italians and the Germans have grown further apart.

Now the Germans - before a key Merkel-Sarkozy meeting on Tuesday - are saying they want nothing to do with eurobonds because it would weaken fiscal discipline.

It would be easy to see eurobonds leading to massive back-sliding in countries like Italy and Greece. The integrationist German Finance Minister Wolfgang Schaeuble says: "I rule out eurobonds for as long as member states conduct their own fiscal policies."

The French, too, are briefing that "you cannot have eurobonds while maintaining national economic and budgetary policies".

Last week Otmar Issing, a former member of the ECB's executive board, pointed out that eurobonds would lead to higher rates for countries like Germany.

"Those who claim that this effect would be small succumb either to an illusion or deliberately underestimate this risk," he said.

He believes that free riding would be encouraged. Lack of fiscal discipline would be rewarded and fiscal solidity punished. And for Mr Issing the implied transfer of money would violate the fundamental democratic principle that there should be "no taxation without representation".

One danger for Europe is that its voters wake up to discover how much sovereignty has been lost in order to save the single currency.

Even if the eurobond moment has not yet arrived there are others suggesting that the main bailout fund, the European Financial Stability Facility (EFSF) should be increased in size so that it could support Italy, Spain, or even Belgium.

Austerity package

Some suggest the fund would need to be between two and three trillion euros. Such a potential liability is so great that it could jeopardise the AAA rating of France if not Germany. Even Germany - with its debt-laden local government - cannot guarantee the debts of the rest of Europe.

European leaders in difficulty queue up to underline that the real problem is not a national one but a European or even a global one.

Italian Prime Minister Silvio Berlusconi fell back on the global crisis to explain why he was introducing a new austerity package at the dictate of the ECB.

"Our hearts are bleeding," he said. "We are facing one of the greatest challenges on the planet. The whole system of relationships between states is changing."

Perhaps, but in seeking international help from countries like Germany, the Netherlands, Austria and Finland it would be wise to recognise how deep the hole may prove to be. Greece is enjoying a second bailout but already it is judged to be not enough yet again.

In order for Greece to have any hope of returning to growth and solvency, its debt levels must be reduced by around 50%. So far the second bailout package - given the most optimistic interpretation - will reduce the debt to GDP ratio from around 160% to only 144% by 2020.

Portugal may need re-funding. Ireland too.

In Spain, industrial production was down 2.7% in June. Like Italy its debts are not falling.

And for those who argue that ultimately funds will have to be transferred from the prosperous north to the south there is a warning sign. For decades northern Italy has been transferring money to the south. It has had only a marginal impact at best.

The calculation for Angela Merkel and for Germany has to be this: If all of Germany's economic might were thrown behind saving the euro would it be sufficient or could it end up de-railing the German economy? No German chancellor would be forgiven for that.

What Naples does is to remind German taxpayers just how different some European cultures are and the risks in sharing the costs of their debts.